Q4 2022 Adtalem Global Education Inc Earnings Call
[music].
Greetings and welcome to the fourth quarter fiscal year 2022 earnings calls, where I would tell them global education. At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
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Please note. This conference is being recorded I'll now turn the conference over to your host Sandra can you come see.
Knight Director Investor Relations you may begin.
Thank you I'd like to remind you that this conference call will contain forward looking statements within the meaning of the safe Harbor provision of the private Securities Litigation Reform Act of 90, 95 with respect to the future performance and financial condition of Italian global education that involve risks and uncertainties.
Actual results may differ materially from those projected or implied by these forward looking statements potential risks uncertainties and other factors that could cause results to differ are described more fully in item one a risk factors of our most recent annual report on Form 10-K filed with the SEC and our other filings.
With the S E.
Any forward looking statement made by US is based only on the information currently available to us and speaks only as of the date on which it was me we undertake no obligation to publicly update any forward looking statement, whether written or verbal that may be made from time to time, whether as a result of new information future developments.
Or otherwise except as required by law during today's call. Our commentary will refer to non-GAAP financial measures, which are intended to supplement their not substitute for our most directly comparable GAAP measures. Our press release, which contains the GAAP financial and other quantitative information to be discussed today as well as the.
Reconciliation of GAAP to non-GAAP measures is available on our website. Please note that all financial results and comparisons made during today's call are on continuing operations basis exclude special items and are in comparison to the prior year period, unless otherwise stated telephone and webcast replays.
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We'll begin today's presentation with prepared remarks from Steve Beard at Adams, President and Chief Executive Officer, and then hear from Bob failing Senior Vice President and Chief Financial Officer. Following the prepared remarks, we will have a question and answer session and with that I'll now turn the call over to Steve.
Thank you Sandra.
Good afternoon, everyone and thank you for taking the time to join our fourth quarter and full year 2022 earnings call today.
I'd like to begin with a high level review of our progress on the strategic priorities, we laid out just under a year ago.
2022 with a transformational year for talent.
Dog by solid finish in the fourth quarter.
Despite the headwinds faced by our sector, we met our expectations on both the top and bottom line.
And continue to expand margins.
These results reflect our commitment to execution by our colleagues across the portfolio.
To recap.
We made good progress on the integration of Walden, delivering our first year target of $30 million and run rate cost synergies.
And using the integration as a catalyst for transforming the whole of that talent.
Starting with <unk>.
Panic efficient and better integrated operating model.
During the year, we completed a successful divestiture of our financial services segment.
Which enabled us to significantly reduce our net leverage.
And strengthened our balance sheet.
While focusing on our go forward strategy to be the leading provider of professional talent to the health care industry.
And finally.
We began a $150 million accelerated share repurchase program with the goal of returning capital to shareholders using existing cash.
While demonstrating our confidence in the long term prospects of the company.
Yeah.
I'm encouraged by our progress to date.
Our clarity of purpose and sharpened focus on the attractive health care education space.
Well to deliver substantial value for all of our stakeholders.
Now, let's take a closer look at the highlights for the full year.
We delivered fourth quarter and full year results in line with our expectations. Despite the challenging environment for our institutions.
Total enrollment of over 77000 students resulted in revenue of $1 $4 billion.
As you progressed, we expanded operating margins through the rollout of our new operating model and the realization of synergies from the Walton acquisition.
For the full year, we grew operating margins by 230 basis points year over year.
And we reported adjusted EPS of $3.24.
Which was 40% higher than the prior year.
Our performance in the fourth quarter reflects an 11 must drive to reposition the organization and enhance operational effectiveness.
And while we are still in the early stages of this effort. We believe the results will prove compelling.
Although enrollments have been negatively impacted by pandemic related headwinds, particularly in nursing.
We are better positioned today to capture higher returns as the overall demand environment improves.
Last quarter I shared several initiatives focused on enhancing operational effectiveness, most notably in customer experience and marketing.
That work is ongoing but I am pleased to report that we're making good progress.
For example.
On the customer experience side, we've recently launched a new approach to measuring engagement across our institutions.
Empowers, our faculty with predictive analytics, they can support our efforts to drive improved persistence.
And on the marketing side of the house, we recently introduced new rigor to measuring the efficacy of our brand and media investments.
Including brand tracking.
Media attribution.
Campaign effectiveness and a b testing tools that allow us to test variations of our campaigns to determine which elements performed best.
Finally, these efforts at enhancing operational effectiveness are complemented by an ongoing focus on strengthening our financial position and driving improved long term financial performance.
With the reduction in our net leverage to one five times, we have a strong balance sheet.
And we maintain an enterprise wide cost discipline that allows us to thoughtfully manage expenses, while making targeted investments and enhanced capabilities.
Yeah.
In summary.
We believe that we are taking the necessary and proper steps.
To position ourselves for success as we look to maximize the academic and economic value of our market, leading breadth depth and scale.
Yeah.
With respect to academics were.
We're proud to produce highly trained practice really professionals at scale.
For our collective force for good in the communities and organizations they serve.
Expanding access and driving superior student outcomes are foundational to this dynamic.
And our commitment to delivering this value has never been stronger.
Let me share a few examples from the fourth quarter.
Chamberlain University secured are granted over $1 million for its practice ready specialty focused program with.
Which prepares nurses to contribute day, one to a variety of specialized settings, such as perioperative services.
Also are.
Our medical schools graduated more than 750 students.
With over 74% entering primary care specialties that helped to combat their critical shortages of physicians across the country.
In 2022, 26% of bad towns Medical school graduates are underrepresented minorities are pulling more than 100 identify as black or African American.
Taken together with last quarter's first time residency attainment rates at these schools, which were the highest ever since we've operated these institutions.
We continue to be encouraged in our ability to expand the value we create for our medical students.
Yeah.
At Walden, Dr. Doug Gilbert a member of our faculty was named a full bright scholar.
He'll traveler, Lithuania, which is the host countries supporting his work.
And he's one of nearly 40 members of the wall of the community that have taken part in what is one of the most widely recognized and prestigious scholarships in the world.
Also during the quarter, we made two promising additions to our senior leadership team with the appointment of Michael bets as the President of Walden University and the promotion of urban trend to senior Vice President Chief strategy and transformation officer.
Michael has extensive operational and strategic marketing experience.
Before joining our team he was the leader at Mckinsey and company's growth transformation practice.
He led a number of successful transformations across various BTC industries, including retail education and media.
Prior to joining Mckinsey he served as the Chief marketing Officer, and Chief strategy Officer for Strayer University.
Where he drove improvements in marketing pricing and product innovation.
I'm excited to have Michael on the team and I'm confident that his deep industry experience and driving large scale growth programs across the higher education sector will help Walt and realize its full potential.
Since joining our talent in 2019 I had been shrinking has played a critical role in the formulation and execution of our strategies.
He was central to the acquisition and integration of Walden University.
And the divestitures of our Brazil and financial services businesses.
He has also served as a valuable partner to me and other senior leaders across that talent.
Evan will lead the next phase of our integration work, where we transitioned to accelerating the performance of our institutions across all of our value creating activities.
With that let me now provide some color on our outlook for fiscal 'twenty three.
With respect to enrollment over the past year pandemic fatigue health care professionals have been under tremendous pressure.
Resulting in continued enrollment declines and post licensure nursing programs.
And Covid related hospitalizations have risen again recently.
Suffice it to say it remains a challenging time for the higher education industry overall.
At a robust job market and high inflation have only added to those challenges.
Having said that.
We are cautiously optimistic that the demand environment will improve in the latter half of fiscal 'twenty three.
Which should enable us to leverage the benefits of the investments, we're making across the full range of enrollment and student support activities.
We're closely watching market signals that affect demand.
And some early indicators are worth noting.
Including first.
A rise in the number of federal student aid applications by 5% year over year, notably driven by low income and underrepresented students.
Next after a year of declines online search for nursing programs began trending upwards in the fourth quarter of fiscal 'twenty two.
Potentially signaling improved market dynamics in the coming months.
Moreover.
Our employer partners, who have suggested that travel nurse compensation is coming off its pandemic highs and beginning to trend downward which.
Which could favorably affect demand for post licensure nursing programs.
And finally.
Our employee partners are focused on creating predictable pipelines for nursing talent by deploying financial incentives to minimize economic barriers.
Considering these indicators.
We anticipate having the opportunity to grow enrollment in fiscal 'twenty three with the benefit of an enhanced operating model.
Better operating leverage and of course.
High quality student outcomes.
And I'd be remiss, if I didn't point out that our business is not materially exposed to economic impact from the volatile supply chain disruptions.
Our oil price fluctuations that are a hallmark of the current global macro environment.
It's against this backdrop that we announced that we expect our revenue for fiscal 2023 to be within the range of $1.38 billion and 1.45 billion.
And that we expect adjusted diluting diluted earnings per share to be within the range of $3 95.
To $4 in 'twenty.
Bob will elaborate further on our guidance in his remarks.
Despite the uncertainty that has come to characterize life for all of us during these times.
Our colleagues here at Ann Taylor are working tirelessly to enhance the value we create for students.
More now more than ever we are mission driven and purpose led.
And we have exciting opportunities ahead of us.
With a new focus.
With market, leading brands and.
And an experienced management team all of which I believe positions us for long term profitable growth.
With that I'll turn the call over to Bob for a discussion of our financial results.
Thanks, Thanks, Steve.
Today, I'll review, our financial results and key drivers for our performance in the fourth quarter and full year late.
Later in my remarks, I will discuss our expectations and assumptions for fiscal year 2023.
Clearly, we finished 2022 and solid fashion and I'll elaborate on the drivers for the same.
Let's begin with the summary of our financial performance starting with the topline.
Revenue in the fourth quarter increased 62% to $361 $2 million compared with the prior year driven by the acquisition of Walton for.
For the full year revenue was $1.39 billion up 53% or $482 million versus the prior year.
The year over year improvement was driven primarily by the acquisition of Walton.
As a reminder, Walden was only owned by a tell them for part of the first quarter during fiscal 2022.
Consolidated operating income excluding special items for the quarter was $88 $1 million, an increase of 175% compared with the prior year due to the addition of Walden and operating efficiencies.
We continue to expand our operating margins to 24% compared to 14% for the same period in the prior year.
For the full year consolidated operating income excluding special items was $271 $3 million, an increase of 73% versus the prior year, resulting in operating margins of 19, 6% an increase of 230 basis points year over year, driven primarily by opera.
Additional efficiencies and realization of cost synergies associated with the Wabash integration.
Net income from continuing operations for the quarter was $59 9 million and diluted earnings per share. Excluding special items was $1 31 growing 173% over fiscal 2021.
For the full year net income from continuing operations increased 33% to $158 $2 million, resulting in diluted earnings per share of $3 24.
We're a 40% increase compared with the prior year, excluding special items.
Next I'll discuss financial highlights by segment.
The Chamberlain segment reported fourth quarter revenue of $142 million, a decrease of 1% when compared with the prior year and operating income of $41 $1 million up 37% from $31 million in the prior year.
The increase in operating income was primarily the result, lower marketing and continued benefit from cost synergies.
Total student enrollments during the quarter decreased five 8% compared with the prior year, which was primarily attributable to COVID-19 related headwinds in our post licensure online nursing programs, leading to fewer new starts.
Total pre licensure on campus enrollment continues to grow aided by improved persistence.
Turning to Walden revs.
Revenue in the fourth quarter was $137 $1 million and operating income was $12 $8 million.
Segment operating income, excluding special items was $36 $1 million.
Total student enrollment during the quarter decreased nine 5% compared with the prior year because of Covid related headwinds in our post licensure nursing programs, leading to fewer new starts.
As recently noted by the CDC COVID-19 cases reached the highest level since mid February during Q4, causing hospitalizations across the country to double since may.
Our post licensure nursing programs were affected as a result of this surge with further which further burdens nurses leading to fewer new starts.
On the other hand, our social and behavioral programs continued to perform well.
It's important to remember that while COVID-19 headwinds are expected to subside over time enrollments typically trail behind the macro trends and we continue to believe that demand for nurses will outpace supply over the long term representing growth opportunities for us in the future.
In our medical and vet segment, we are beginning to see better operational performance, resulting in improved financial results.
Revenue in the fourth quarter increased 3% to $83 $9 million compared with the prior year and segment operating income increased 30% to $14 $5 million.
Operating income excluding special items was $19 $6 million, an increase of 74% compared with the prior year driven by the revenue increase coupled with the benefit from cost synergies.
Total student enrollment increased three 5% compared with the prior year, which was primarily attributable to growth in new student enrollment and higher persistence and all our programs.
With the ongoing abatement of COVID-19 travel restrictions, resulting in higher starts and our initiatives to improve persistence, we expect a more favorable environment for enrollment in this segment.
We will remain focused on our cost discipline initiatives to improve the profitability of the schools.
Now, let's turn our focus to cash flow balance sheet capital structure.
For the full year net cash provided by continuing operations was $163 $8 million and capital expenditures totaled $31 million as a result free cash flow for fiscal 2022 was $132 $8 million, an increase of $3 $9 million compared.
With the prior year as.
As a reminder, we define free cash flow as cash provided by continuing operations less capital expenditures.
Okay.
During the year, we made great strides in our financial strategy by deploying capital to strengthen the balance sheet as well as to maximize return for our shareholders.
In the fourth quarter, we repurchased $394 $1 million of our senior secured notes as a result gross debt was $859 $2 million as of June 30th, reflecting a significant reduction of 31% during the quarter and almost 50% since our acquisition.
Walter.
Net leverage finished at 1.5 times well below our target of two times.
Our progress in reducing debt over the past two quarters has been achieved while we executed a balanced approach to capital deployment as we continue to invest in organic growth opportunities and as you know we executed an accelerated share repurchase program in March where we bought $4 7 million shares of the company's common stock.
Going forward, we intend to further strengthen our balance sheet, while we continued to reinvest in our businesses for future growth.
Turning to our guidance.
In fiscal 2023, we anticipate growth in new starts improvements in persistence and pricing.
And an additional one and a half months of revenue from Walden compared with FY 'twenty two.
However, it is important to remember that we are beginning this fiscal year with a lower enrollment base versus 2022.
Taking into consideration the net effect of these different factors, we expect FY 'twenty three revenue to be in the range of $1.38 billion and one point for a $5 billion and adjusted diluted earnings per share of $3 95.
To $4 20.
From continuing operations, excluding special items, reflecting continued year over year expansion of our operating margins.
In light of the complexities of the markets, we serve I'd like to provide more color as I walk you through the factors, we took into consideration when developing our guidance.
First it's important to keep in mind, the calendars Asian of our financial results for fiscal 'twenty three.
As Steve mentioned in his remarks enrollments are expected to ramp up in the latter half of the year as we anticipate COVID-19 headwinds will begin to abate occur.
Accordingly, we expect both revenue and EPS to improve to a greater degree in the second half of the year as our investments towards initiatives and persistence and marketing for new starts will begin in the first half of the year and green gained traction throughout the year.
Also throughout 2023, we remain focused on driving productivity and increasing operating efficiency through our expense management initiatives and cost synergies from the integration of Walden.
We remain on track to deliver an additional $30 million in cost synergies and the completion of the second anniversary of the acquisition of Walton, which will help drive the year over year improved operating margins.
As I look back on our performance in 2022, it's one where we showcased our ability to operate with greater efficiency and a track record of consistently improving financial results that have positioned us well for the future.
With that I will now turn the call over to the operator for Q&A.
Thank you and at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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One moment, please while we poll for questions.
Our first question comes from the line of Jeff Mueller with Baird. Please proceed with your question.
Yeah. Thank you I know you gave it to us and a lot of detail already but just trying to better understand kind of the.
The guidance and market assumption I guess, so it sounds like and correct me, if I'm wrong, but you're already seeing the improvement in bad debt.
Where you're expecting more incremental improvements.
And it's more based upon early leading indicators is about post licensure.
Cursing and then I guess, there's pockets of all of them that are already performing well just help us understand what gives you confidence in.
I guess, what specific parts of the business, you're assuming a better environment and what gives you confidence with embedding that I guess into guidance at this stage.
Great Great question, John Thank you.
So.
As you noted.
We're already seeing.
Some encouraging signs in med vet, and we're expecting that to continue over the course of their enrollment cycles in fiscal 'twenty three.
We are also seeing encouraging trends in the social and behavioral sciences programs at Walden.
What we're expecting.
It is lagging.
And if you will.
Where we've where we've had the most trouble during the pandemic, which is the post licensure nursing programs and as you know Walden is all post licensure nursing thats the biggest product they take to market and obviously Chamberlain has a mix of pre licensure and post licensure, but we do think.
Given a bit of relief.
From some of the.
The headwinds from the pandemic.
Enrollment trends will improve in the back half of the year.
We also know that the demand environment for those programs and those professionals has only grown stronger.
Over the last couple of years.
That's what we are.
Our pricing into the guide if you will.
Okay, and then Oh.
What's the operating margin assumption then you have a lot of below the line tailwind that are contributing to the EPS growth. So if we back into it it seems like there's not a lot of margin expansion, considering you're going to get an incremental 30 million of expense synergies or just help us with the the off.
Sets I heard increased marketing spend and spend.
Thing on persistence initiatives.
Yes.
We do expect over the course of the full year in fiscal 'twenty three to further expand margins.
That won't necessarily happen sequentially, because we intend.
To invest particularly in marketing, where we see.
The opportunities to drive the improved enrollment that we're looking for also as you mentioned, we've got investments, we're making to drive improved assistance, which also helps the enrollment picture.
But year to year or year over year, we do believe there is an opportunity to achieve further margin expansion.
See that flow through on a full year basis.
Okay, and then just last on capital allocation.
I think he said one five times net leverage two times target but.
Plan is too.
Strengthening the balance sheet, just help me understand.
The rationale for that with your leverage currently below target.
Yes.
Got it.
The accelerated share repurchase program in flight.
We've obviously got an authorization.
From our board for open market purchases beyond that ASR.
With respect to the debt.
We're certainly comfortable with where we are from a leverage perspective, but as we think about the dynamics in the debt markets things that are happening with interest rates there may be.
Some targeted opportunities to take some debt off the table in a way that brings the overall interest expense line down.
Joe Bob will be focused on that as we go through the year and should those opportunities present themselves. We have got the cash flow.
To go after it.
Got it thank you.
Okay.
Our next question comes from the life.
From the line of Jeff Silber with BMO capital markets do you foresee with your question.
Jeff Silber beam.
BMO capital markets you May proceed.
Can you hear me now.
Yes, yes.
Okay great.
Weinstock kind of breaking up so I can get the question through so I know in the past you've talked about some operational constraints in terms of getting clinical rotations for some of your students and we're finding faculty I. Just was wondering if we can get an update on that if that's gotten any better.
It's not it's not a constraint on growth at this point.
Obviously.
The market for faculty talent is tight, but we feel like we're pretty well positioned.
Particularly on the nursing side of the business and as we think about clinical opportunities for our medical students.
Feel like we're in good shape, there as well so as we sit here today.
Both clinical opportunities and faculty are not a constraint on our ability to grow enrollments.
Okay, that's great to hear and I hate to ship this over to a regulatory discussion, but you've had a lot of disclosure in your 10-K.
Given that Theres a lot of moving parts I know not everything is finalized yet but specifically.
It looks like the 90 10 rule is changing youre going to have to include military and veterans not just for you, but everybody in the calculation I'm just wondering how that would impact you.
Your ratio and also I think you had some disclosure about your financial responsibility score from a corporate level potentially going below one and a half I was just wondering if you can talk about that as well. Thanks.
Yes, so as you know.
Voluntarily moved to 80 515, some years ago as part of its student commitments.
Obviously, the final rules on what that might look like but yet to be yet to be finalized.
But as we as we evaluate what's available out there from the department to date, we don't expect to have any challenges with a with.
With a rule reduction to 80 515.
Even with the inclusion of the military and veterans benefit. So we feel like we are in.
Good stead there.
With respect to that.
Posit score.
As you know.
Okay.
Uh huh.
Passing composite score with the department of Education currently.
We expect that when.
When we submit audited financial statements to the department as we do every year for purposes of calculating that score.
The additional goodwill on the balance sheet related to the world and acquisition will drive that score down.
And at that point.
You may have to.
We may have to provide additional.
Credit support too.
So the department in connection with our title for participation.
We feel like we've got.
Wherewithal to do that from a capital structure perspective, so any additional requirements that the department might make of us.
They are well within our means to handle and handle comfortably so that too.
We don't anticipate being an issue for us or our ability to.
Well the enrollments of the business or rollout program. So again.
On both dimensions.
We think we're in good shape.
If there are no more questions from Jeff Silber.
Okay.
The next question we have is from the line of Matt Swope with Baird. Please proceed with your question.
Yeah, Hi, guys. So I'm I'm coming at you from the from the fixed income side of Baird.
Wanted to follow on to a couple of those guys questions. Just on the Walden front are you able to give us fourth quarter revenue as compared to what they did in the fourth quarter last year before you owned them.
Yeah.
No we've not provided historical.
Performance data on Walden as a standalone entity prior to our ownership because they reported as part of the segment that included other.
Other assets.
<unk>.
So no I'm not able to tell you what what Q4 revenue was.
Yeah.
For Lori when they owned the business.
Right. So if we look at Lori yet what they reported than it's not apples to apples to what you guys just reported for Q4 right now.
It was a segment I think they referred to as online. If you included some operations in Mexico and elsewhere in the United States. So it's not a clean.
Clean apples to apples comparison.
We can obviously, we can look at the student numbers year over year, but we just don't have a rev.
Yeah sure into the same point, you know and again I'm a little more focused on the EBITDA side and the leverage side. When you guys report that one five times net leverage that adjusted EBITDA number does not give you credit for the for one and a half months of of Walden right. So that so that number is actually.
A little bit understated.
Correct.
Got you and that and again, that's that that's not a number where you can sort of gross us up to what that number would have been if you had owned walden for that extra one and a half months.
No we've not we've not tried to put a normalized.
EBITDA number out there right, but we're just we just know that's a tailwind that in a good way.
And then maybe taking them one more shot at this from another angle.
When you gave your fiscal 2023 guidance for revenue for the 1.38 to 1.45.
Is there an apples to apples number for fiscal 'twenty two that we can compare that to so again, it's just another way of asking if if there is some some other walden piece, we can fill in so we can compare apples to apples, but it sounds like maybe not.
No no I don't think so.
I apologize for that but no there is not an apples to apples comparison for you.
I got it.
On that 2023, three guidance number do you guys have a 2023 EBITDA guidance number for that.
We don't guide to EBITDA.
But.
As we go over the course of the year will talk a little bit about what's happening.
Its margins.
But we don't we don't guide to EBITDA.
Okay.
And then and then just to go back to Jeff's question is about the sort of one and a half net leverage currently with the two times target.
But then you made you made the comment Steve I think that that you guys may see some targeted ways to take that down specifically could that be buying bonds in the open market below par, where that's an opportunity right now.
I think it really depends on.
Look the opportunity we'd be looking for would be the opportunity to bring down overall interest expense.
And again.
The world looked a lot different four months ago than it does now and who knows where it looks four months from now, but if there's an opportunity to do that either on the bond side, we're on the <unk>.
Our loan side, but we'll take a hard look at that because.
We've got the cash to do it.
Right for sure.
And then just one last one for me if I could you guys filed an 8-K back in February about the department of education announcement related to Devry and tied to Cogs, while capital and all of that do you have any update on that situation has anybody contacted you about that or do you have any viewpoint on where that might go.
No.
So I think I said a quarter ago.
We've not heard from the Department I don't believe Devry has heard from the department.
Well I think the administration's efforts to.
Did your broad base debt forgiveness are in full swing I think.
The overall risk profile for four day, Brian for us around this issue Hasnt.
It hasnt changed materially so no updates in that regard.
Got it okay. Thanks, very much guys.
My pleasure.
Yeah.
And we have reached the end of the question and answer session and I will now turn the call back over to Steve Beautiful closing remarks.
I just want to take a moment to thank all of our colleagues.
Cross the talent portfolio for.
Their incredible work in fiscal 'twenty two.
We believe we set ourselves up well for a fantastic year in fiscal 'twenty three and.
And we're looking forward to getting after it and proving out some of the some of the thesis we've talked about today. So.
Thanks to the team.
And this concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
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Yeah.